Price-Capping is nearly always bad

The news all around the exhibition industry at the moment is of Price-capping. The Karnataka Chief Minister in his budget speech announced that the Government would be looking at capping prices in multiplexes and also trying to ensure that multiplex operators ensure that ﬁlms in the local language are given some form of prime place in terms of number of shows and show timings.

Whilst there have been no speciﬁcs on this and it is just a proposal at the moment, there is a lot of historic precedence to it and therefore this week has been full of journalists trying to ascertain the effect of this on the multiplex business, which has been one of the industry’s ﬂag bearers of late.

The Tamil Nadu government has capped prices there for a long time now and in Maharashtra a few years ago there was a similar proposal to give a shot in the arm to the Marathi ﬁlm industry (which ironically needed no such false lobbying). There is of course a historical and social element to this. Films, certainly in the South, are viewed by many as a social good with the idea of high ticket prices leaving the common man unable to see their heroes on the big screen. In addition, the concept of blocking a certain number of screens at peak timings gives regional ﬁlms the best chance to prosper as well as they are more accessible.

This of course is just pure protectionism in an industry that needs no such thing. What the consumer decides to pay for the opportunity to see a ﬁlm should be something left completely to the free market. As should be the choice of an exhibitor as to which ﬁlm they play and when. If the market demands a ﬁlm at a certain time and certain price, the exhibitors will make it available. That is what the free market is all about. Why would they not? This idea that exhibitors are colluding to ensure that regional or niche ﬁlms get no visibility is illogical. Exhibitors ultimately get no MG from the audience and therefore can only prosper if people come in to see a ﬁlm. No amount of price ﬁxing can save a movie no one wants to see. No amount of timing adjustment can either.

What are the obvious effects of a price-capping situation in Maharashtra, if it was ever imposed? Assuming that this cap is lower than current market prices to provide the social goals Governments wish for, there would be many but a few of the obvious ones would be:

1. More black marketing of tickets would occur if there was a cap. The advent of multiplexes and premium seats means that black marketers are priced out of the business to an extent. However if Rs 350 tickets are given away for Rs 150 due to Government regulations, there will almost immediately be a niche created to exploit the demand and ability for some people to afford a higher rate. This is highly detrimental to the business.

2. The business model for multiplexes in the higher income areas will go down. A lot of the big cities have localities which can support higher ticket rates – in Mumbai there is South Bombay or Bandra – and investments in theatres there are made with this in mind. Any capping of tickets would make those investments null and void and seriously affect the return on capital in these projects. This is not a good sign for a business looking to compete with global competition.

3. Global players looking for an entry into India would be discouraged. There has been a lot of talk of the big players on the global stage entering the country – Wanda for instance – and any form of protectionism or price capping will suddenly make investments in this sector highly unadvisable. This again would not be a happy situation for a capital-intensive business that will soon need foreign investment to grow and make the sector compete with its nearest rival – China.

4. Consumers will not be able to show their demand for certain content. Demand is demonstrated in two ways – either supply rises to compensate or price rises to reduce. If prices are capped this is not possible and if price caps are added to with some form of reservation for local language content then supply also cannot rise to compensate for higher demand. This will lead to a lot of disgruntled consumers who may turn to other modes of entertainment like TV, SVOD or worse piracy (see Black marketing in point 1).

5. A cap on prices also doesn’t allow segmentation for exhibitors. Film content like any other product has to be segmented to target certain markets which that content may better suit. A price cap removes this ability and makes the content very homogenic in nature which means that ﬁlms will have no way to cater to niche audiences or take advantage of demographics. This again affects the business model at the retail level.

These are just a few of the worries that price caps can lead to. Even though they have been in place in Tamil Nadu it is not something that has worked in any other State (Andhra has one but premium prices can be charged should proper permissions be gotten). It is therefore not an advisable step for a government to make as the free market is the correct way to price a ﬁlm – just like anything else.

Multiplexes will certainly move to petition the Karnataka state government should any such decision be taken as the major operators there would stand to lose considerable ATP’s (average ticket price) should the government introduce such protectionist behaviour. As a concept, it is against what the ﬁlm industry believes and is governed by.

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